JOURNALS OF ROBERT MAAS

Monday, May 19, 2014

PITY THE POOR TAX AVOIDER: THE ECONOMY WILL SUFFER WITHOUT HIM!

BLOG 149

PITY THE POOR TAX
AVOIDER: THE ECONOMY WILL SUFFER WITHOUT HIM!

I have
received an e-mail from edftax, who provide tax strategies (I think these are
what most people call tax avoidance schemes).
They are urging people to lobby MPs to protest about the Finance Bill
proposals on tackling marketed tax avoidance schemes, and in particular the
proposals that HMRC should be able to require those who seek to avoid tax to
put their money on the table before they can pursue an appeal, even if they entered
into their tax scheme before the proposals were announced.

Edftax have
surveyed their clients and have discovered that, if they have to pay the tax
that they have sought to avoid (as is likely at some stage even apart from the
Finance Bill proposals as HMRC are winning most tax avoidance appeals),

93.4% of
their clients cannot pay the tax

99.6%
believe that having to pay the tax on their past income is likely to affect
investment, expansion and development plans in place for their business

68.3% will
have to consider making staff redundant in order to pay their tax, which could
lead to 8,000 redundancies.

82.1% say
that having to pay the tax on their past income or capital gains would affect
their ability to pay current tax and duties due to HMRC.

66.1%
believe that having to pay the tax on their past income will force their
business into insolvency.

I find these
statistics astounding. Surely a business
that employs staff and makes investment and plans to expand and develop, goes
into a “tax strategy” in the knowledge that it may not work. I tell my clients, in the context not of tax
avoidance but of simple planning, that nothing is certain in tax. I cannot predict what HMRC will or will not
challenge; all that I can do is to recommend a strategy that I believe will not
be attacked and, if it is, the client is likely to win. I would be astounded if my clients ignored
the possibility of attack to such an extent that, if at the end of the day we
were to lose, it would push their business into insolvency. Yet two-thirds of edftax’s clients seem to
have done just that. Indeed, virtually
all of their clients seem to have recklessly spent their tax money, with
indifference as to whether or not their scheme worked. I find it hard to comprehend how so many
people can act so irresponsibly.

As a
taxpayer, I hope that HMRC will keep a very close eye on the 4 out of 5 of
edftax’s clients who believe that having to pay the tax on their past income
will affect their ability to pay current tax.
HMRC surely ought to feed the edftax client list into their
risk-assessment processes and ensure that such people pay their future tax
liabilities promptly.

edftax are
asking people to lobby their MPs to oppose the Finance Bill Clauses. They are particularly anxious to lobby MPs on
the Finance Bill Committee which is considering the proposed legislation. The Committee Stage Hansard is pretty dull
reading, so I look forward to those clauses being reached. It will be fascinating to see which MPs are
willing to support those who seek to avoid tax and the strength of the
arguments that they deploy.

In Blog 136,
I highlighted the Tax Avoidance Liberation Front (Westminster Branch), the
Westminster 18, the 18 MPs who were petitioning the Chancellor a year ago to
prevent HMRC pursuing the collection of tax from those who had entered into
failed tax avoidance schemes and, like most of edftax’s clients now, had spent
the money without providing for the tax.
The Westminster 18 felt that it was unreasonable for HMRC to take the
same enforcement action against unsuccessful tax avoiders who had spent the tax
money as they take against other people who had, for example, invested their
tax money in their businesses, donated it to charity or otherwise spent their
income without providing for tax.
Luckily for edftax, one of the Westminster 18, Teresa Pierce, the Labour
MP for Erith and Thamesmead, is a member of this year’s Finance Bill
Committee. I accordingly suspect that
they can count on her to strongly promote their case.

MPs are,
presumably, referred to as honourable members because they are expected to be
honourable, not hypocritical. Teresa can
hardly say that she believes that some tax avoiders who have recklessly spent
their tax money should be let off their tax debts but does not believe that
other tax avoiders who have done the same thing should be treated so
leniently. That would be a ridiculous
position to adopt. It would also be
clearly unfair, which goes against the Labour party’s (or at least Ed
Milliband’s) core values; “We cannot shrug our shoulders at injustice”. Accordingly I cannot wait for the Committee
to reach clauses 192 – 222 of the Bill.
It will be fascinating to see how Teresa presents her plea for sympathy
for the tax avoider.

Friday, May 16, 2014

HMRC's HAND IN YOUR POCKET

BLOG 148

HMRC’s HAND IN YOUR
POCKET

The
consultation paper on George Osborne’s plan to let HMRC raid your bank account
to collect money that you owe them (or that they think you owe them) has now
been published. It is open for consultation
until 29 July. Co-incidentally last
Saturday’s Times told me that HMRC have dismissed MPs warning that “mistakes
could mean innocent people’s bank accounts might be plundered”, saying, “We’re
not going to be dipping in and out of anyone’s account. This is only about hard-core defaulters who
have ignored a minimum of four requests for payment”.

Unfortunately
it is not clear either how HMRC can ensure that a person is not identified as a
“hard-core defaulter” by mistake or what they mean by a hard-core defaulter. The consultation document explains that 10% of
taxpayers in self-assessment “file late or do not file at all, which can create
a debt owed to HMRC”. That is not quite
right. Not filing does not create a
debt; non-filing entitles HMRC to make a determination (i.e. to make a wild
guess at what you owe) and that determination creates a debt, the amount of
which can be altered only by filing a return.
So is a person who, for whatever reason, does not file a tax return a hard-core
defaulter? Commonsense would say, “Of
course not”. However that does seem to
be how the government interpret the term.

You are
probably thinking that I am being unfair.
HMRC say that they are going to send such a person at least four
requests for payment. It appears though
that the “at least four requests” included “letters reminding them that they
are due to file a tax return and pay”.
Many people get such a reminder in September and a further one in
December. That’s two of the four
requests. After the end of January, a
taxpayer gets a penalty notice (request 3) and he gets a warning before HMRC
make their determinations (request 4).
Accordingly all four lives will have been lost before the debt has even
been quantified.

Of course
HMRC say that in most cases a taxpayer will have received a minimum of nine
reminders. In their Case Study he seems
to have received a lot more than 9. So
if HMRC want this power as a last resort, why should the law specify four
reminders? In HMRC’s Case Study 1, they
seem to envisage around 14 reminders. Many of us would be a lot more
comfortable if it specified 14. With only 4 reminders (all of which can be
reminders not that tax is owing, but that a tax return needs to be filed)
mistakes are undoubtedly going to occur.

I suspect
that HMRC’s view is that safeguards are proposed, so that mistakes can be
rectified before any money is taken.
Let’s look at another Case Study.

1.Jane is widowed in March 2005. She had been married for 50 years and her
husband had always handled all of the family finances.

2.In April 2005, Jane receives a notice
to file a tax return. So does her
deceased husband. Jane writes to HMRC
telling them that her husband had died and she has no income.

3.In September 2005 Jane (and her
deceased husband) receive a reminder that a return is due. Jane assumes that this computer-generated
letter has been issued by mistake and ignores it.

4.In January 2006, Jane receives a
further letter reminding her that a tax return is due. She does not know what to do as her late
husband always completed her tax return.

5.In March 2006, Jane receives a
penalty notice. She does not understand
it but as it is for only £100, she assumes that it is correct and pays it.

6.Jane’s daughter Jenny, who lives in
Australia, does not want Jane to be on her own on the anniversary of her
father’s death so she persuades Jane to come to Australia for a few weeks.

7.On the morning Jane is due to fly to
Australia, she receives a determination for £50,000. She does not know what to do. She phones HMRC in a panic. Like many 70-year olds she is not too
comfortable with phoning people, particularly as she is going a bit deaf. She half hears a lady reciting a menu of
different things, most of which seem irrelevant to her and which in any event
she hears indistinctly. Eventually she pushes a number and receives a message that she is being held in a queue, she
is the 25th person in the queue and she might find it easier to call
back later. Jane does not want to miss
her plane. She decides she will sort out
the problem when she gets back from Australia in three weeks time.

8.When Jane returns home, she finds
that HMRC have taken the £50,000 from her bank account.

Of course
HMRC will say that cannot happen as Jane is not a “hard-core defaulter”; she is
simply a confused and frightened pensioner who is having to learn how to handle
her own finances, having been insulated from that for the last 50 years. But legislation that enables HMRC to take
Jane’s £50,000 is surely unfair legislation; it is irrelevant whether in
practice HMRC are not going to use the legislation on Jane. A learned judge said many years ago that a
person should be taxed by law, not untaxed by concession. It is surely equally right that if a person’s
human rights are to be infringed, they should be infringed by law, not
protected by HMRC’s discretion.

In any
event, the consultation document does not say that the legislation is aimed
only at hard-core defaulters. It makes
clear that it is also aimed at “those who are in a position to pay but choose
not to, or delay payment for as long as they can” and “those who deliberately
avoid engaging with HMRC”. HMRC
undoubtedly regard Jane as falling into the second of those categories. The first will of course include the small
businessman desperately trying to keep his business afloat and paying bits
fairly to all of its creditors (including HMRC) whenever it gets some money in,
as it needs to get over its cash flow problems before it can thrive. The good news is that HMRC do not want to
force viable businesses into insolvency.
The bad news is that whether or not a business is viable is down to the
judgement of an HMRC Officer whose job is to collect money due to HMRC and who
has probably had no experience of having to juggle limited funds to try to keep
a large number of creditors exercising patience. If the HMRC Officer judges that the business
is not viable, HMRC will grab whatever cash is there. Curiously the last Labour government thought
it unfair that debts due to HMRC should be given preference over debts due to
other creditors and abolished Crown preference.
The current government seem to be restoring it. I leave it to you to decide which political
party pursues more “business-friendly” policies.

There are a
lot of other worrying things in the proposals.
HMRC will “request” from your bank information about all of your
accounts, including current and savings accounts and ISA’s, along with current
balances and details of transactions within the previous 12 months. Goodbye bank secrecy! HMRC are to be given power to require your
bank to hand over to them your bank statements for the last 12 months even
though these do not include taxable income and have no relevance to your tax
affairs. Currently the Human Rights Act
1998 gives you the right to respect for your private and family life, your home
and your correspondence except where interference with that right is “necessary
in a democratic society in the interest of … [inter alia] the economic well
being of the country”. In order to
collect taxes, is it “necessary” for HMRC to have access to Jane’s bank
statements? Surely not. Even HMRC do not claim that. They say they need the information to ensure
that they leave Jane with enough to live on!
How generous; but surely nothing to do with “the economic well-being of
the country!” So goodbye your
fundamental human right to privacy. Big
Brother has finally arrived (albeit a little later than George Orwell’s guess
that it would take only until 1984 for the State to take control over citizen’s
private lives).

Incidentally,
that word “request” seems to have acquired a new meaning. The proposal is that your bank “should be
required to provide this information within five working days”. So in HMRC speech, “request” no longer has
the connotation that a person is free to ignore a request; it now has the same
meaning as “require” or “demand”.

There are
two safeguards to protect Jane. The
first is that she can “provide evidence to HMRC’s satisfaction that DRD action
will cause undue hardship or that the debt is no longer due”. The second is that she will “continue to have
the right to judicial appeal on the use of DRD”. It is not clear what this means. It appears to mean that she can apply to the
High Court for judicial review of HMRC’s actions. But this is an expensive process that most
taxpayers cannot afford to pursue, and HMRC are sitting on your money so you
may well not have the resources to pay the legal costs and live for the many
months that are likely to ensue before your appeal is heard.

Every year I
go to an accounting show in Chicago. That
is my annual update on US tax. A few
years ago, one of the speakers was explaining how to get a time to pay
arrangement with the IRS. You call
them. You will speak to someone charming
whose sole objective is to get you to tell him the name of your employer (so
they can garnish your salary) or the name of your bank (so they can garnish
your bank account). You must not reveal
this information. If you achieve that,
someone else from the IRS will call you back and agree a payment plan.

HMRC do not
need such a procedure. If you receive
bank interest they already know your bank account details through the returns
of interest that the bank has to make each year. If you do not have an interest bearing
account but have given your bank details on your tax return to speed up a
repayment due, or you are in business and pay PAYE or VAT, both of which are
required to be paid electronically, they know your details too.

What HMRC
propose to do is to gather together all of the accounts that they know about,
ask your bank, building society or ISA provider if they know of any others;
look at the bank statements, decide what they think you need to live on, and
grab the rest (up to the amount of the debt).

If you are
so old-fashioned that you want privacy and do not want HMRC to be able to pry
into your private life, the only safe thing is to open a current account with a
bank overseas and put your private finances though that account. HMRC cannot obtain access to bank accounts in
another jurisdiction. Safe in this
context is not an absolute term.
Although HMRC cannot access your overseas account, the world is a
shrinking place. They may be able to ask
the tax authorities in the bank’s country to get the bank statements for them –
although it is unlikely that the other country will let them grab funds from
your overseas account. But make sure
that your overseas account is not interest-bearing as there can be massive penalties
if you forget to declare the interest on an overseas account.

Wednesday, May 07, 2014

SEND EVERYONE TO JAIL!

BLOG 147

SEND EVERYONE TO
JAIL!

George
Osborne announced on 14 April that the
government intend to consult on plans to introduce a new strict liability criminal
offence for individuals who hold money offshore. HMRC will only have to demonstrate that
income is taxable and undeclared to secure a successful criminal prosecution.

For example
–

1.

Rose comes from a poor family in Jamaica. She has been recruited by the NHS to work in
a London hospital. She works very hard
and leads a frugal life because she wants to send as much as she can back to
Jamaica so she can put together the deposit on a house for her mother to live
in. It has taken a long time to build up
sufficient funds because the interest paid on the bank deposit in Jamaica is
very low. Rose is paid by the NHS under
PAYE and has never been sent a tax return in the UK.

George Osborne wants to send
Rose to jail. He thinks she should know
that her Jamaican bank interest is taxable here and that it is her
responsibility to tell HMRC that she is receiving Jamaican bank interest even though
she has had no communications from HMRC other than her PAYE Notice of
Coding. As the law stands, she cannot be
sent to jail because she has no intention of avoiding tax; she is simply
unaware, like the vast majority of the people who live in this country, of her
tax obligations. George Osborne does not
believe in reasonable excuses and thinks Rose should go to jail.

2.Raj is an Indian computer programmer. He lives and works in India. He is sent by his employer to work in the UK
for six months. While here, he sells
some Indian shares and pays tax in India on the capital gain.

George Osborne wants to send
Raj to jail. Because he is here for six
months, he is resident here. As a
resident, he is liable to tax here on his Indian capital gains. There is probably actually no tax to pay as
the UK will give credit for the Indian tax paid. Nevertheless, Raj should have declared the
capital gain so in George Osborne’s view he should go to jail.

3.Mary has always lived in the UK, but two years
ago took a job in France. Her mother
became seriously ill and Mary came back to the UK to look after her. In order to nurse her mother, Mary stayed in
her mother’s house. Mary’s French
employer is very understanding and continues to pay her salary into her French
bank account on the understanding that Mary will work at least four hours each
day remotely over the Internet. Sadly,
Mary’s mother died and after the funeral Mary returned to France. She was in England for 100 days and did not
even consider that she might be taxable here.

George Osborne wants to send
Mary to jail. Because she was here for
100 days, had been UK resident here within the previous three years, lived in
her mother’s house and did some work in the UK, Mary became resident here
(although it is improbable that she knew it).
As a resident, she is taxable on her French salary in the UK even though
it has been taxed in France and the French tax is likely to eliminate any UK
tax liability.

Of course,
George Osborne undoubtedly did not have Rose, Raj and Mary in mind when he
devised his new criminal offence. They
are what the Americans call “collateral damage”. George wants to send people to jail who evade
tax by hiding their offshore income from HMRC.
However, he thinks it unreasonable that HMRC should have to show that
such people intended to evade tax in the same way as the State has to prove
that a person is guilty of any crime before he can be sent to jail. He wants HMRC to be able to send Rose, Raj
and Mary to jail simply because it is too difficult for HMRC to distinguish
between criminals and those who are simply ignorant or naïve.

Curiously,
the Human Rights Act provides that, “Everyone charged with a criminal offence
shall be presumed innocent until proved guilty according to law”. Fortunately
for George, the Human Rights Act also provides that the UK Courts must ignore
human rights if it is not possible to interpret the legislation in such a way
as to give effect to them; but then the Human Rights Act is based on the
European Convention on Human Rights and, just because those nasty foreigners
believe that innocent people should not be jailed at the whim of the State,
doesn’t mean that the UK should adopt the same attitude. After all, George Osborne is constantly
telling us that he is committed to a fair tax system, so it must be fair that
Rose, Raj and Mary should be sent to jail to punish them for their ignorance of
the details of our highly complex tax system.